Accounting For Group Structures

Question 1

Consolidated financial statement

Answer 1

Financial statements of a group presented as a single economic entity

Question 2

Group

Answer 2

Parent & Subsidiaries

Question 3

Parent

Answer 3

Control one or more entities known as subsidiaries

Question 4

Subsidiary

Answer 4

Typically a company that include unincorporated entity such as partnership or trust fund

Question 5

Control over an investee

Answer 5

being in existence when
the investor ‘is exposed, or has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee’.

Question 6

Consolidated financial statements provide information about the financial performance and position of an entity
that exists in an economic, but not a legal, sense

Answer 6

Company A holds all of the issued capital—and voting rights—in Company B. Company A and Company B would each
be considered to be separate legal entities. Company A would be considered to be the ‘parent’ and, because Company
B is controlled by Company A, Company B would be considered to be the subsidiary of Company A. Company A and
Company B together would be considered to represent a ‘group’, and while Company A and Company B might be
considered to be separate legal entities, Company A and Company B together would constitute a single economic entity

Question 7

Rationale for consolidating the financial statements of different legal entities

Answer 7

The purpose of providing consolidated financial statements
is to show the results and financial position of a group of organisations as if they are operating as a single economic
entity; these consolidated financial statements represent the consolidation of the financial statements of
many separate legal entities. That is, the consolidated financial statements represent the combination of the financial
statements of all the entities within the group, with the ‘group’ comprising the parent entity and all of its subsidiaries.
When consolidated financial statements are prepared we get one set of financial statements (plus supporting notes)
that cover the entire group.

one consolidated statement of profit or loss and other comprehensive income covering the group
∙ one consolidated statement of financial position covering the group
∙ one consolidated statement of changes in equity covering the group
∙ one consolidated statement of cash flows covering the group.

Question 8

Example of simple consolidation

Answer 8

For example, if Company A and Company B, as shown in Figure 25.1, have cash of $500 000 and $400 000
respectively, the consolidated financial statements would show cash of $900 000 being controlled by the economic
entity.

consolidation
process does not involve any adjustments to the financial accounts of the individual entities making up the group.

The effect of previous consolidation adjustments will also not be reflected in the opening balances
of the ledger accounts of any entities within the group. Supplementary worksheets are utilised to
perform the consolidation, and we will call these ‘consolidation worksheets’. The preparation of
consolidated financial statements will not obviate the need for separate entities to prepare their own,
separate financial statements.

Question 9

consolidated statement of profit or loss and other
comprehensive income

Answer 9

show the result derived from operations with parties external to
the group of entities.

Question 10

Intra group transactions

Answer 10

The effects of all intragroup transactions—in other words, the transactions
between organisations within the economic entity—are eliminated, since from the economic entity’s
perspective (that is, the controlling or parent entity and its controlled entities) income will not be
derived as a result of transactions within the group, only from transactions with external parties.

Question 11

Parent - investment entity

Answer 11

No need to consolidate subsidiaries

Question 12

3 consolidation concepts

Answer 12

1. Entity concept
2. Proprietary concept
3. Parent-entity concept

Question 13

Entity concept

Answer 13

The entire group is viewed as a single economic entity, incorporate all of bthe assets & liabilities of parent entity and its subsidiaries. Liabilities owing to party external to the economic entity. transactions between the individual entities making up the
economic entity, for example, sales and purchases, dividends paid and received, and receivables and payables, must
be eliminated as part of the consolidation process. non-controlling interests are treated as part of consolidated equity.

Question 14

Non- controlling interests

Answer 14

For example, if Company A owned 80 per cent of Company B (with Company A therefore being considered to
be the ‘parent entity’) and the remaining 20 per cent of the shareholding was owned by an unrelated entity, the noncontrolling
interest in Company B is 20 per cent.

Question 15

Proprietary concept

Answer 15

all assets and liabilities of the parent entity and only a
proportionate share of the subsidiaries’ assets and liabilities are included in the consolidation process. Non-controlling
interest is not included if it is considered external. if the parent entity holds 70 per cent of the shares in the
subsidiary, it would include 70 per cent of the assets, liabilities, revenues and expenses in the consolidation process.

Question 16

Parent-entity

Answer 16

all assets and liabilities of the parent and its subsidiaries are
included. The non-controlling interest is treated as a liability, rather than as part of equity.

Question 17

Control

Answer 17

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee.

Question 18

Undertake consolidation

Answer 18

To undertake the consolidation of the parent and subsidiaries’ financial statements, a worksheet is typically used
(as will be shown here). It is usual to set up the worksheet so that the entities to be consolidated are arranged side by
side in the left-hand columns. To the right there are debit and credit columns for the consolidation adjustment entries.
A final column on the right-hand side of the worksheet will provide the consolidated figures to then be used to compile
the consolidated financial statements.
What should also be noted is that the individual account balances included in the ledgers of the separate legal entities are
not adjusted as a result of consolidating the financial statements of the various entities within the group. The consolidation
entries are made outside of their individual ledgers. The consolidation journal entries are written into a consolidation journal
and are then typically posted to a consolidation worksheet. A new worksheet is prepared each time consolidated financial
statements are required. As indicated above, the consolidation worksheet provides the numbers that are used directly to
construct the consolidated financial statements. This is a VERY IMPORTANT point to remember.

Question 19

Steps in consolidation

Answer 19

1. Eliminate parent’s investment in subsidiary